VCs zero in on ITES after dotcom fiasco

CHENNAI: The venture capitalists have shifted from dotcoms to IT Enabled

Services (ITES) after the dotcom debacle is the buzzword doing rounds now. With

the Indian IT Enabled Services sector expected to grow at a CAGR of 30 per cent

and contribute 20 per cent of the $50 billion revenue target projected by

NASSCOM for the year 2008 in software exports, doesn't seem to be a bad choice

for the venture capitalists.

"The dynamics and market reality of ITES business makes it attractive

for venture capital funding. It is a high margin (low cost of manpower) and

large volume business with average investment returns of over 40 per cent.

Further, it requires substantial investment due to the high cost of technology

and communications infrastructure in India. Since the traditional sources of

funding such as term loans and bank financing are scarce, entrepreneurs would

have to look at venture capital funding for establishing their business,"

says Infinity Venture fund co-founder and chairman Saurabh Srivastava.

Allsec Technologies director and CEO Jagadish Ramamoorthi also concurs with

him that the customer interaction services, which is slowly shifting base from

other countries to India, is a capital-intensive business. "Funding is a

very important resource for the industry. What VCs look for in an enterprise is

scalability. Since the call center industry in the US is growing at almost 15-20

per cent annually, we are talking of addressing the large requirement, which

currently is serviced by either captive or local call centers."

Though instances of VC funding has not been cited in Tamil Nadu ITES industry

so far, the idea seems to have caught up with the Coimbatore-based medical

transcription company, KG Information Systems Limited (KGISL). It is looking for

VC funding to fund its second phase of growth, and gives itself a fair chance of

80 against 20 for closing deals with VCs. If VCs cited lack of established proof

of concept and slow customer off-take for the disinterest in the sector earlier,

the situation seems to have changed for the better.

Likewise, Accel Software Solutions, a group company of Accel, into the

CAD/CAM/GIS segment, says that they won't be looking at VC funding in the

immediate future though it has expansion plans. "Though we are planning to

enter the call center and data center business and expand into the CAD/GIS

market in Europe, Australia and Japan, we would not be looking at VC funding as

an option right now. But we might look at it subsequently," says Accel

Software Solutions general manager Wing Commander K. Krishnan.

Servion Global Solutions echoes that sentiment, "If the industry thinks

that VCs will give the necessary fillip it wants to reach the heights, then it

is mistaken. VCs never give thrust. VCs come in only after a few successes are

reported in the sector to provide funding," says Servion director S.

Madhavan.

However, Rajesh Jog, managing partner, eVentures India, feels that the ITES

sector offers tremendous scope and will see increased VC activity to

approximately $500m over the next 18 to 24 months. "The economics of the

ITES business is great. And outsourcing to India is becoming mainstream

phenomenon as firms in the US and Europe are under pressure to cut costs. We see

the need for over $0.5 billion in funding over the next 24 months in this

segment alone. I would expect at least $200 m funding in this segment this year.

That will allow for aggressive build-outs of infrastructure on a scale needed to

attract global clientele. It will allow for a move away from being a cottage

industry."

The expected $200 million figure is double the amount estimated to have been

invested in the segment by VCs last year. For the time being though VCs seem

content of having found a segment that would give them good returns on

investment, it remains to be seen whether the ITES sector would pay them rich

dividends or not.